Hi, I'm Krista, back with another topic on Find the Facts, a weekly series where we relearn things we may have been taught incorrectly and debunk viral information from the internet.
Since 2020 taxes are due in less than a week — here's your friendly reminder that the due date is May 17 — what better time to talk about them than right now??? I know, I know: Taxes are not a SUPER-EXCITING topic, but we gotta do 'em, so we may as well learn some tips on how to save money and avoid getting audited, right?! 😰
Let's start off with why it may be beneficial to file taxes, even if you aren't required to. "The income threshold where you're required to file taxes changes every year. This year it is $12,400 and $400 if you're self-employed. Generally, if you make under this amount, you don't have to file, but it's good to file because you may be entitled to a refund," said Ahad.
If you're thinking about previous years when you may have gotten a refund but didn't file because you didn't make enough, you can backfile up to three years to get your money. The best part about this is that the IRS will actually pay you interest with your refund! "However, after three years, even if you are entitled to a refund, you don't get it. Every year, billions of dollars in refunds go unclaimed," said Ahad.
If you don't file taxes because you owe money, sometimes the IRS files the tax return for you. "When they file taxes on your behalf, they don't add all the deductions and things you're entitled to, so it's always good to file yourself."
And if you owe the IRS money from previous years, there's a 10-year statute of limitation. "After 10 years, the IRS cannot come after you for tax debt. So if you have a tax bill waiting from like nine years ago, you may as well wait until the tenth year, when it disappears," said Ahad.
"Owed taxes don't affect your credit score, but there are other ways that it can affect your life. The IRS can levy your bank account; they can levy your wages — they'll try all of these tactics to get that money out of you. However, there are people who are completely off the radar, and they don't have much the IRS can take," he said.
And, as everyone knows, not paying your taxes for many years will leave you with a ton of penalties and interest...so we are NOT suggesting that you wait 10 years until your tax debts disappear!
With the start of the pandemic last year, let's discuss some ways taxes are different when you file this year and what you may benefit from. "There are some special things to know due to the CARES Act. One of them is the stimulus payments. If you were a dependent on your parents' 2019 taxes, you can file independent for 2020 and get the first two stimulus checks — even if you had no income," explained Ahad.
Another overlooked deduction is education. There is something called the Lifetime Learning Credit where if you take courses to better yourself or your career, you can get a tax credit for it.
Now, what are red flags for potentially getting audited on your taxes? Ahad said self-employed people — like freelancers, independent contractors, etc. — who exaggerate their deductions are at high risk. "The IRS has so many metrics to go off of. They have millions of taxpayer data, and they'll compare them all. So, for example, let's say you put that you spent $15,000 on supplies for your job, and everyone else put an average of $5,000 — that is a red flag. You're likely to be flagged for an audit."
You may also get flagged if you are not properly categorizing expenses. "I've seen people put high dollar expenses on one line. You want to make sure that you're not over-exaggerating what you spent, but also that you are separating each expense out with the proper descriptions," Ahad said.
Another red flag Ahad often sees is people putting down huge charity deductions. "If someone makes $50,000 and they are donating $5,000 to charity, that is a lot. Look and think about your income versus your deductions," he said.
If you do get audited, the IRS will send you a letter in the mail. "The IRS never sends emails or even phone calls — and they rarely call. A general audit can go back three years...however, they can go back up to seven years if you understate more than 25% of your income," said Ahad.
So how do you know if you need a tax expert to do your taxes or if you should just do them yourself? Ahad said not everyone needs a CPA. "Once you start having a complicated tax situation — like rental properties, business ventures, or multiple sources of income — that's when you should consider a tax professional, because there are way too many deductions, myths, and rules that most people don't know about."
"CPAs like me can do simple returns too. It's just peace of mind working with us if you get a notice later on and you don't understand it. You can send it to us — we will be there. We have very personal relationships with our clients, so if you have future endeavors and future goals, we can help. If you work with TurboTax or someone online, you're going to get a different person every year; you don't know who they are. They don't know your history or know you on a personal level like we do."
If there's no way you will be ready to file your taxes by next Monday when they're due, you can file an extension, which gives you until October 15 to file your 2020 taxes. However, it's important to note that extensions give you time to file but not pay. So if you think that you will owe, you will still need to make a payment by May 17.
How do you determine what to pay when you file your extension? "The general rule to avoid penalties is to pay what you paid last year. If you are owed money, there is no penalty for filing late — you can file any time subject to that three-year limitation," Ahad said.
Special thanks to Ahad Ali from Ahad&Co. Be sure to follow him on TikTok and Instagram for more financial advice!